CT3 


GIFT   OF 


GIFT 
SEP  17 


GOVERNMENT 
FINANCING 


IKWIN  G.  JENNINGS 

Assistant  Secretary 
METROPOLITAN    TRUST    COMPANY 


PUBLISHED    BY 

THE    METROPOLITAN    TKUST    COMPANY 

OF    THE    CITY    OF    NEW    YORK 
60  WALL  STREET  716  FIFTH  AVENUE 


Government  Financing 


A  brief  treatise  on 

a  matter  of  present -day  interest 

presented  in  the  form  of 

questions  and  answers 


Irwin  G.  Jennings 

Assistant  Secretary 

Metropolitan  Trust  Company 


Published  by 

The  Metropolitan  Trust  Company 

of  the  City  of  New  York 


5.1 


CONTENTS 


PART      I     SOME   OF   THE   PRACTICE 
Pages  5  to  13  inclusive 

PART     II     A  LITTLE  OF  THE  THEORY 
Pages  13  to  27  inclusive 

PART  III     THE  PRESENT  LAW 

Pages  27  to  34  inclusive 

PART  IV    A   FEW   SUGGESTIONS 
Pages  34  to  46  inclusive 


INTRODUCTION 


/^OVERNMENT  finance  in  war  times  is  not  the 
^-^  same  as  in  peace  times.  The  demands  of  the 
greatest  struggle  into  which  our  country  has  ever 
entered  is  calling  for  financial  contributions  from 
every  self-respecting  American.  These  contributions 
may  be  voluntary  gifts  or  may  take  the  form  either 
of  investments  in  government  securities  or  of  tax 
payments.  Very  many  men  who  have  never 
felt  the  burden  of  taxation,  are  now  required  to  obtain 
information  on  its  principles  if  they  are  to  meet  the  new 
obligation  intelligently.  It  is  our  belief  that  we  should 
not  only  have  responsible  government,  but  a  responsible 
citizenship,  that  our  government  should  first  be  intelli- 
gent in  its  financial  policy,  courageous  in  carrying  it 
out,  willing  to  acquaint  the  tax  payer  with  the  reasons 
for  the  demands  upon  him  and  confident  of  his  ready 
and  patriotic  response.  We  shall  endeavor  herein  by 
the  method  of  answering  the  questions  which  are  most 
likely  to  occur  to  the  ordinary  mind  upon  the  subject 
of  war  finance  and  taxation,  to  fix  such  guides  as  will 
better  enable  our  readers  to  understand  and  appreciate 
the  discussion  of  the  subject  which  will  inevitably  be 
featured  in  newspapers  and  periodicals.  This  booklet 
contains  an  outline  of  the  arguments  for  and  against 
many  of  the  questions  that  will  arise.  We  hope  it  will  be 
helpful  and  suggestive  and  will  stimulate  further  in- 
quiry into  one  of  our  important  public  questions. 


38448;> 


Government  Financing 


PART   I 

SOME    OF    THE    PRACTICE 

"There  is  little  distinction,  but  no  opposition  betvreen  theory 
and  practice.  Each  to  a  certain  extent  supposes  the  other. 
Theory  is  dependent  on  practice;  practice  must  have  pre- 
ceded theory."  —Sir  W.  Hamilton. 

CJ   Describe    briefly    the    methods    used    by    our    own 
country  in  financing  its  wars. 

REVOLUTIONARY  WAR.  When  the  Revolutionary 
War  started,  the  Colonists  had  practically  no  funds. 
There  was  no  taxation.  The  Continental  Congress  could 
only  draw  against  the  several  colonies.  It  was  difficult 
for  the  country  to  negotiate  any  loans.  However, 
France,  having  made  us  our  first  loan,  was  followed 
later  on  to  a  lesser  extent  by  both  Holland  and  Spain. 
All  these  loans  were  paid  off  between  1791-95.  Our 
first  domestic  loan  of  six  thousand  pounds  was  made  in 
1776  and  was  taken  at  par.  Our  second  domestic  loan 
was  for  $5,000,000,  but  it  was  not  a  success,  only 
about  three-fourths  of  it  being  raised  in  twelve 
months'  time.  An  attempt  was  even  made  to  raise 
money  through  a  lottery.  Finally,  Congress  authorized 
an  issue  of  paper  money  to  meet  the  expenses  of 
the  army  and  by  the  year  1780,  more  than 
$200,000,000  of  this  type  of  money  had  been  issued 
by  Congress  while  the  colonies  had  issued  an  almost 
similar  amount.  Before  the  war  was  over,  this  paper 

5 


GOVERNMENT        FINANCING 


money  had  become  practically  worthless.  It  ceased  to 
pass  as  currency  and  sold  as  an  article  of  speculation. 
It  was  said  that  barber  shops  were  papered  with 
the  bills.  Then  came  forward  certain  patriotic  citizens, 
among  them  Robert  Morris,  who  gave  his  own  security 
wherever  he  could  to  bolster  up  the  credit  of  the  gov- 
ernment. The  Bank  of  Pennsylvania  greatly  aided  in 
financing  Washington's  army  at  Valley  Forge  by  issuing 
its  own  notes  and  thus  became  in  all  probability  the  first 
bank  of  issue  in  the  country.  In  1791,  on  a  real  money 
basis,  the  total  debt  was  about  $75,000,000.  As  was 
noted  above,  the  debt  was  paid  off  by  the  year  1795. 
There  was  little  financial  policy  developed  —  money 
or  credit  from  any  country  or  any  source  was  acceptable. 

THE  WAR  OF  1812.  While  this  war  was  anticipated 
and  though  it  had  authorized  a  loan  of  $11,000,000 
three  months  before  war  was  declared,  Congress  was  not 
ready  with  an  adequate  financial  policy.  Gallatin 
had  given  the  matter  some  attention,  but  wavered  in  his 
policy,  favoring  loans  at  the  beginning,  later  advocating 
the  raising  of  enough  money  by  taxes  to  provide  for  the 
annual  expenses  on  a  peace  basis,  the  interest  on  the 
existing  debt  and  the  interest  on  annual  loans.  But  this 
decision  of  his  came  too  late  to  convert  Congress  to  a 
strong  policy  of  taxation  and  the  country  was  committed 
to  financing  the  war  on  the  credit  theory.  Of 
the  first  $11,000,000,  only  a  portion  was  subscribed. 
The  next  loan,  calling  for  $16,000,000,  was  sold  at 
88.  Short-term  treasury  certificates  bearing  interest 
were  also  used.  At  first,  these  were  conservatively 
used  as  a  temporary  loan  in  anticipation  of  future  rev- 
enue, but  later  on  these  were  issued  with  no  definite 


GOVERNMENT         FINANCING 


provision  for  redemption,  and  in  denominations  of  less 
than  $100,  bore  no  interest.  The  natural  result  fol- 
lowed. The  credit  program  of  financing  broke  down 
and  a  more  vigorous  tax  policy  had  to  be  substituted. 

MEXICAN  WAR.  This  was  a  short  war,  in  which  there 
was  no  serious  financial  depression  and  the  debt  created 
was  easily  met.  All  the  loans  were  placed  at  par  and  a 
portion  of  them  yielded  a  premium.  The  loan  was  sub- 
scribed for  in  specie,  the  first  loan  negotiated  on  this 
basis  since  the  foundation  of  the  government.  Treasury 
notes  bearing  interest  were  also  conservatively  used. 
The  credit  of  the  country  was  high  and  no  financial 
policy  could  be  said  to  have  been  thoroughly  demon- 
strated. 

CIVIL  WAR.  When  Lincoln  took  office,  a  financial 
panic  was  on.  When  the  war  broke  out,  Lincoln 
appointed  Salmon  P.  Chase,  an  Ohio  lawyer,  Secretary 
of  the  Treasury,  whose  experience  in  public  finance  was 
only  that  which  came  with  his  being  Governor  of  Ohio. 
In  1862,  the  Legal  Tender  Act  was  passed,  authorizing 
an  issue  of  $150,000,000  worth  of  legal  tender  notes 
and  an  issue  of  bonds  in  the  amount  of  $500,000,000. 
The  bonds  bore  interest  at  6%.  The  Civil  War  loans, 
with  one  exception,  were  all  placed  at  par  in  currency, 
subject  to  a  commission  to  those  selling  the  bonds. 
Specie  payment  was  suspended.  The  great  weakness  in 
financing  the  Civil  War  was  in  the  delay  to  apply  effec- 
tive taxes.  In  1861-2  the  ratio  of  loans  to  taxes  was 
$8.32  to  $1,  in  1862-3  as  $5.51  to  $1,  in  1863-4  as 
$3.38  to  $1,  and  in  1864-5  as  $2.95  to  $1.  There  was 
no  disposition  in  the  country  to  shirk  the  burdens  of 
increased  taxation.  People  were  impatient  to  contribute. 

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GOVERNMENT         FINANCING 


The  first  income  tax  was  authorized  August  5, 
1861,  at  a  rate  of  3%  on  the  excess  of  all  incomes 
above  $800  per  annum.  This  was  increased  until  in 
1865  incomes  between  $600  and  $5,000  were  taxed  at 
5%,  above  $5,000  at  10%.  As  to  loans,  both  non- 
interest  bearing  and  interest  bearing  notes  were  used, 
temporary  loans  and  long  term  ones.  At  the  end  of  the 
war,  the  country  had  an  indebtedness  of  about 
$3,000,000,000.  In  the  face  of  the  uncertainty  and 
complications  that  arose,  it  would  take  a  long  stretch 
of  the  imagination  to  denominate  our  financial  policies 
of  the  Civil  War  as  successful. 


THE  SPANISH-AMERICAN  WAR.  In  1898,  Congress 
authorized  an  issue  of  $200,000,000,  10-20  year  bonds. 
More  than  $198,000,000  were  sold  by  the  government 
at  par.  So  popular  was  this  loan  that  it  was  oversub- 
scribed seven  times.  Bonds  of  this  issue  during  the 
year  1899  sold  as  high  as  110-3/4.  After  the  war, 
the  Secretary  of  the  Treasury  tried  to  buy  these  bonds 
back,  but  could  only  purchase  about  $20,000,000  of 
them.  The  Loan  Act  was  supplemented  by  the  War 
Revenue  Bill  of  June  13,  1898.  Nearly  all  the  taxes 
on  tobacco  and  fermented  liquors  were  doubled,  special 
taxes  were  laid  upon  banks,  brokers,  proprietors  of 
theatres  and  amusement  places  in  general.  Stamp 
taxes  were  imposed  upon  a  great  variety  of  commercial 
and  other  transactions.  As  compared  with  our  present 
war,  the  expenditures  during  the  four  months  of  hos- 
tilities were  not  large,  but  the  permanent  result  of  the 
war  was  a  higher  level  of  expenditures  and  taxes  for 
all  federal  purposes. 


GOVERNMENT         FINANCING 


CJ    What  are  the  methods  of  taxation  adopted  in  the 
present  war  by  the  principal  European  belligerents? 

ENGLAND.  From  the  beginning  of  the  war  down  to 
October,  1917,  the  British  government  followed  the 
usual  methods  of  war  financing.  The  temporary  needs 
of  the  Government  were  provided  for  by  the  sale  of 
treasury  bills  or  of  short-term  bonds  and  when  this 
floating  indebtedness  became  too  large,  formal  war 
loans  were  issued  for  the  purpose  of  funding  the  tem- 
porary debt  now  no  longer  relied  upon.  From  the 
beginning,  however,  Great  Britain  more  than  any  other 
of  the  European  countries  has  employed  a  policy  of 
taxation  designated  for  bigger  things  than  of  meeting 
current  expenses  and  paying  the  interest  on  the  loans. 
This  policy  of  definite  taxation  has  steadily  increased 
until  it  has  become  the  controlling  feature  of  the 
British  policy.  Especially  has  the  theory  of  taxing 
war  excess  profits  developed  in  England.  Here  is  a 
real  war  profits  tax.  It  is  not  a  tax  on  all  profits  beyond 
a  certain  amount,  nor  does  it  depend  upon  the  relation 
existing  between  profits  and  capital.  The  basic  idea 
of  the  war  profits  tax  is  that  there  are  certain  indus- 
tries which  are  abnormally  stimulated  by  war  and  to 
that  extent  the  gains  may  rightfully  be  absorbed  to 
pay  for  the  struggle  by  which  they  are  brought  about. 
England  adopted  such  a  tax  beginning  with  the  rate  of 
50%  which  was  subsequently  increased  to  60%  and 
has  finally  been  further  increased  to  80%.  The  most 
significant  feature  of  the  English  statute  is  to  safeguard 
the  tax  payer  against  being  required  to  pay  on  profits 
not  of  the  kind  intended  to  be  taxed — that  is  to  say,  not 
war  profits.  Its  measure  is  primarily  the  increase  of 
the  taxable  year  profits  over  the  profits  of  the  pre-war 

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GOVERNMENT         FINANCING 


period  which  consisted  of  any  two  years  selected  by 
the  tax  payer  out  of  three  years  ending  in  1914,  with 
the  right  in  some  cases  of  selecting  four  years  out  of  the 
six  years  preceding  the  war.  It  is  only  in  the  interest 
of  avoiding  injustice  that  the  tax  payer  is  given  the 
choice  of  having  an  allowance  of  percentage  on  capital 
invested  in  place  of  the  allowance  based  on  pre-war 
profits.  A  board  of  referees  plays  a  prominent  part 
in  the  English  system  of  excess  profits  taxation  and  set- 
tles many  complicated  questions.  It  is  especially  em- 
powered to  make  allowance  for  amortization  in  case  of 
special  plant  investments.  The  English  law  provides 
for  average  increased  profits  during  the  entire  war 
period  so  that  if  the  tax  payer's  profits  in  the  first  year 
of  the  war  fall  below  the  profits  of  the  pre-war  period, 
an  excess  profit  in  the  following  year  is  first  applied 
to  make  good  the  deficiency  and  the  taxes  are  applied 
only  if  the  average  profit  for  the  two  years  shows  an 
increase,  and  so  on  for  the  other  years  of  the  war.  In 
spite  of  its  great  burdens  on  the  British  public,  Eng- 
land's tax  theory  seems  to  be  working  very  satisfactorily. 

FRANCE.  In  the  first  part  of  the  war,  it  was  not 
thought  best  by  the  French  government  to  increase  the 
burden  of  taxation  upon  its  people  too  rapidly  and  it 
was  only  gradually  that  the  government  began  to  put 
into  effect  higher  income  and  inheritance  taxes,  taxes  on 
war  profits  and  other  direct  taxes.  By  the  year  1917, 
however,  the  greatly  increased  expenses  of  the  war  on 
the  one  hand  and  the  development  of  French  industry 
and  commerce  by  reason  of  the  war  on  the  other,  made 
it  highly  desirable  that  a  measure  should  be  framed 
for  increasing  the  revenue  from  taxation.  A  new  tax 
measure,  accepted  by  the  legislative  body,  became 

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GOVERNMENT         FINANCING 


effective  on  January  1,  1918.  The  modified  system 
comprised  heavy  increases  in  the  tax  on  inheritances  and 
on  war  profits.  From  now  on  the  tax  on  war  profits  will 
run  anywhere  from  50-80%  graduated  according  to 
their  size.  An  important  feature  of  the  new  system  con- 
sists in  taxes  upon  luxuries.  This  became  effective 
April  1,  1918.  A  tax  of  10%  upon  the  price  paid  for 
any  article  of  merchandise  which  comes  within  the  lux- 
ury class  and  for  expenditures  made  in  such  hotels  and 
restaurants  as  the  departmental  committee  shall  desig- 
nate, is  direct  in  its  nature  and  tends  to  encourage  econ- 
omy in  expenditures.  France  has  borrowed  money 
from  Great  Britain,  Spain,  Holland,  Norway,  Sweden, 
Denmark  and  the  United  States.  She  has  thus  availed 
herself  of  every  legitimate  method  of  raising  money, 
first,  by  taxes;  second,  treasury  bills;  third,  long-term 
bonds;  fourth,  foreign  credit.  This  foreign  borrowing 
is,  in  one  sense,  a  weakness,  but  is  necessary  and  justi- 
fied by  the  burden  which  France  has  borne. 

ITALY  is  not  a  rich  country.  Some  doubt  was  ex- 
pressed in  the  beginning  about  its  financial  ability.  The 
fiscal  returns  of  the  Italian  government  have  been  dem- 
onstrated as  decidedly  greater  than  was  expected. 
Without  serious  difficulty,  eight  hundred  million  dol- 
lars in  taxes  have  been  raised  in  a  single  year  through 
various  normal  and  war  taxes.  This  is  double  the 
receipts  before  the  war.  By  thus  uniting  the  methods  of 
taxation  with  those  of  bond  issues,  the  Italian  govern- 
ment has  maintained  a  policy  of  keeping  the  burden  of 
the  war  from  bearing  too  heavily  upon  its  poorer 
people. 

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GOVERNMENT         FINANCING 


GERMANY.  The  extremes  of  method  in  providing  for 
war  expenses  are  represented  by  England  and  Germany. 
England  up  to  June  30,  1917,  has  raised  by  taxation 
24.31%  of  its  expenses.  Germany  up  to  that  date  had 
not  increased  its  tax  revenue  even  enough  to  carry  the 
current  interest  upon  its  war  loans.  The  original  Ger- 
man idea  was  to  finance  the  war,  principal  and  interest 
entirely  by  means  of  bond  issues.  Her  population  was 
not  to  be  burdened  with  heavy  war  taxes  as  would  be 
the  case  in  the  allied  countries,  but  a  short  war  and  an 
early  victory  were  to  give  enormous  indemnities  which 
would  not  only  pay  the  entire  cost  of  the  war,  but  leave 
a  balance  to  her  credit.  Hence,  during  the  first  two 
years  of  the  war,  the  annual  budget  was  increased  only 
by  such  small  war  costs  as  those  for  pensions,  etc. 
In  1917,  a  much  larger  tax  was  imposed,  and  for  1918, 
the  German  Government  finds  itself  confronted  with  the 
necessity  of  raising  by  taxation  a  still  larger  amount  of 
money  than  in  any  of  the  earlier  years  of  the  war. 
Previous  to  this  time,  no  provisions  for  interest  and 
amortization  upon  the  war  debt  had  been  made  and  the 
best  financial  authorities  of  Germany  had  become 
greatly  alarmed  and  justifiably  so.  Her  policy  seems 
to  have  been  from  the  start  to  raise  all  the  money  possi- 
ble, regardless  of  inflation  and  to  leave  all  arrangement 
for  rectifying  her  finances  until  after  the  war.  This 
policy,  continued  without  modification,  would  have 
ended  in  disaster.  As  it  is,  the  danger  is  imminent.  The 
new  proposals  for  the  German  Empire's  budget  for 
1918  and  1919  are:  first,  to  increase  postal,  telegraph 
and  telephone  rates;  second,  to  increase  import  duties 
on  tea,  coffee,  etc. ;  third,  to  increase  duties  on  beer  and 
champagne;  fourth,  to  introduce  a  new  tax  on  non- 
12 


GOVERNMENT         FINANCING 


alcoholic  drinks;  fifth,  to  establish  a  plant  monopoly; 
sixth,  to  levy  a  special  tax  on  luxuries;  seventh,  to  in- 
crease and  extend  the  tax  on  stock  exchange  transac- 
tions ;  eighth,  to  introduce  a  new  tax  on  interest  paid  by 
banks  on  deposits.  It  will  be  seen  that  these  taxes  will 
not  be  very  productive  and  that  Germany  still  resorts  to 
indirect  taxation.  The  burden  of  taxation  can  thus  be 
shifted  with  ease  to  the  poorer  classes.  There  is  no  in- 
come tax  generally  in  Germany,  although  it  has  been 
used  by  the  kingdom  of  Prussia  for  a  long  time. 

PART  II 
A  LITTLE  OF  THE  THEORY 

"To  despise  theory  is  to  have  the  excessively  vain  preten- 
sion to  do  without  knowing  what  one  does,  and  to  speak 
without  knowing  what  one  says."  — Fontenelle. 

€J    What    is    the    relative    importance    of    government 
financing  in  organizing  for  and  carrying  on  war? 

War  financing,  in  the  nature  of  the  case,  must  be 
extraordinary.  It  is  vital.  Napoleon  is  said  to  have 
attributed  his  defeat  to  the  ability  of  England  to  raise 
money  for  war.  It  has  become  a  truism  that  the  last 
dollar  will  win  the  present  war.  The  problem,  there- 
fore, is  how  best  to  raise  sufficient  funds  for  this  war  so 
as  to  retain  the  good  will  and  loyalty  of  our  citizenship, 
to  least  impair  the  wealth  and  tax  producing  resources 
of  our  country  and  not  unnecessarily  to  handicap  its 
constructive  program  for  the  future. 

CJ    What  are  the  accepted  methods  of  raising  money  for 
war? 

Borrowing  and  Taxation. 

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GOVERNMENT        FINANCING 

tj    What  other  method  has  been  discussed? 

Conscription  of  both  income  and  capital. 

tf    What  principal  forms  does  borrowing  for  war  pur- 
poses take? 

(a)  Bond  issues,  (b)  time  treasury  certificate  issues, 
(c)  demand  treasury  certificate  and  note  issues. 

*J   In  what  main  particulars  do  bond  issues  vary? 

Amount  of  issue,  length  of  term,  rate,  convertibility, 
callability,  taxability,  denomination,  terms  of  payment, 
selling  price. 

€J    What  do  these  terms  mean  as  applied  to  these  issues? 

AMOUNT  OF  ISSUE.  While  Congress  may  authorize  a 
very  large  amount  of  bonds,  it  is  important  from  the 
subscription,  fiscal  and  banking  standpoints  that  no  one 
issue  shall  be  so  large  as  to  endanger  the  sale  of  the 
entire  issue  within  a  reasonable  time  nor  to  constitute 
a  too  sudden  drain  upon  the  money  of  the  country. 

LENGTH  OF  TERM.  This  is  governed  by  the  desire  of 
the  government  to  shift  or  not  to  shift  the  burden  of 
payment  upon  a  later  generation.  The  power  to  so  shift 
this  burden  is  disputed  by  some  economists.  The  conten- 
tion of  those  favoring  long-term  bonds,  is  that  future 
generations,  whose  rights  are  protected  by  the  present 
generation,  should  bear  their  proportion  of  the  burden. 
The  argument  against  the  long-term  bond  is  that  each 
generation  should  take  care  of  its  own  wars,  that  every 

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GOVERNMENT         FINANCING 


generation  is  liable  to  become  engaged  in  a  war  of  its 
own  and  therefore  the  present  generation  has  no  right  to 
impose  its  own  burdens  upon  the  next  and  thus  handi- 
cap the  use  of  the  latter's  funds  for  more  constructive 
purposes. 

RATE.  By  this  is  meant  the  percent  which  the  gov- 
ernment contracts  to  pay  for  the  use  of  funds  loaned  to 
it.  Some  argue  for  the  lowest  possible  rate,  others  that 
the  government  has  no  right  to  expect  to  borrow  money 
below  the  market  rate  and  inasmuch  as  that  rate  is 
around  5%,  that  this  should  be  the  rate  fixed  for  the 
government  issue.  These  would  criticise  our  Liberty 
Bonds  at  ^/2%  and  4%  as  too  low. 


CONVERTIBILITY.  This  is  the  right  of  a  bond 
holder  to  change  his  bonds  into  those  of  another  issue. 
This  right  in  the  holder  tends  to  stabilize  the  price  of 
the  bonds  and  by  thus  allowing  the  change  of  a  low  rate 
bond  into  one  of  a  higher  rate,  eliminates  most  of  the 
objections  to  an  issue  with  a  rate  below  the  market. 

CALLABILITY.  This  is  the  right  of  the  government  to 
call  in  the  loans  before  the  due  date,  by  paying  them  off. 
This  is  a  convenient  and  valuable  feature  in  the  bond 
from  the  standpoint  of  the  government.  There  were 
times  in  the  eighties,  following  the  Civil  War,  when 
the  government  had  surplus  funds  which  it  desired  to 
use  for  the  purpose  of  paying  off  the  national  debt,  but 
did  not  have  the  power  to  call  in  any  of  its  bonds. 

TAXABILITY.  The  arguments  in  favor  of  exempting 
government  bonds  from  taxation  are  as  follows:  It 
makes  them  more  salable,  it  encourages  the  patriotism 
of  the  buyer  by  giving  him  a  tax-free  income  and 

15 


GOVERNMENT        FINANCING 


inasmuch  as  the  government  does  not  tax  itself,  a  tax  on 
its   securities   is   inconsistent.     The   argument   against 
freeing  them  from  taxes  is  that  the  taxation  of  its  securi- 
ties is  not  a  tax  on  the  government,  that  there  is  no  rea- 
son why  a  holder  of  government  securities  should  not 
be  taxed  on  his  government  holdings  since  they  add  to 
his  tax-paying  ability,  that  to  exempt  war  issues  tends 
to  emphasize  the  distinction  between  the  classes  by  giv- 
ing the  wealthy  bond  buyers  during  the  war  a  preferen- 
tial position,  for  the  taxes  to  pay  off  the  bonds  will  be 
raised  from  both  rich  and  poor  after  the  war.     Again, 
such  a  policy  is  unjust  when  the  government  has  adopted 
a  progressively  higher  rate   on  the     incomes     of    the 
wealthy  by  giving  them  a  tax-free  investment  which, 
compared  with  investments  in  other  securities,  is  equal 
to  a  rate  on  these  latter  securities  much  above  the  mar- 
ket rate,  that  is,  a  millionaire  holder  of  3*/2%  tax-free 
bond  receives  as  much  income  from  this  bond,  taxes 
considered,  as  he  would  from  an  8%  or  9%  return 
from  a  taxable  security.    To  exempt  government  issues 
from  tax  on  all  bonds   in  the  hands     of    holders     in 
amounts  below  the  point  of  beginning  of  the  ascending 
surtax  would  not  be  open  to  this  latter  objection.     The 
great  weight  of  the  argument,  therefore,  would  seem  to 
be  in  favor  of  the  policy  adopted  by  our  government  of 
taxing  its  new  issues,  but  freeing  them  from  the  normal 
tax  in  amounts  purchased  up  to  $5,000. 

DENOMINATIONS.  In  time  of  war,  it  is  obviously 
good  policy  to  attract  as  many  government  purchasers 
as  possible.  This  is  so  because  it  promotes  thrift  and 
encourages  patriotism  by  giving  the  holder  an  interest 
of  value  in  his  country's  fortunes.  It  is  well,  there- 
fore, to  issue  bonds  of  smaller  face  value  so  as  to  make 

16 


GOVERNMENT         FINANCING 


them  available  for  the  poorer  though  larger  number  of 
citizens. 

TERMS  OF  PAYMENT.  This  should  be  made  easy  both 
to  encourage  saving  out  of  current  earnings  and  to  pre- 
vent too  sudden  a  drain  upon  bank  resources. 

SELLING  PRICE.  Our  country's  bond  issues  have  not 
always  brought  par.  Inasmuch  as  this  condition  reflects 
upon  its  credit,  it  will  obviously  be  the  policy  of  the 
government  to  secure  par  value  for  its  future  issues  of 
the  bonds.  To  do  this  it  may  have  to  raise  the  rate 
somewhat  nearer  the  market  than  at  present. 

CJ    What  is  the  legitimate  purpose  of  issuing  time  treas- 
ury certificates  in  time  of  war? 

They  are  usually  and  legitimately  used  in  anticipa- 
tion of  the  return  of  funds  from  the  sale  of  bonds. 
They  generally  bear  interest  and  on  account  of  their 
temporary  character,  mature  within  a  comparatively 
short  time  after  being  issued.  When  issued  in  unlim- 
ited quantities  and  without  regard  to  the  above  restric- 
tion, they  tend  to  complicate  and  weaken  the  govern- 
ment's financial  policy. 

C|    What  is  the  status  of  the  war  savings  certificate? 

The  use  of  this  type  of  certificate  does  not  fall  within 
the  objection  raised  to  the  indiscriminate  use  of  time 
certificates  above.  The  emphasis  here  is  not  so  much 
the  desire  on  the  part  of  the  government  to  float  certifi- 
cates as  it  is  to  induce  savings  on  the  part  of  the  wage 
earners  and  the  great  mass  of  people  in  general  who 
would  not  buy  bonds  of  even  the  smallest  denomination, 
but  can  be  induced  to  buy  the  savings  stamps.  The  use 

17 


GOVERNMENT        FINANCING 


of  these  certificates  so  far  as  it  goes  is  one  of  the  best 
methods  of  raising  funds  for  war  purposes. 

€J    What  is  the  value  of  demand  treasury  certificates  and 
notes  as  a  method  of  war  financing? 

They  should  be  used  only  as  a  last  expedient  as  they 
encourage  undue  inflation.  Their  former  use  in  Amer- 
ican finance  has  been  attended  with  disastrous  results 
and  a  policy  of  issuing  them  once  begun  is  difficult  to 
check. 

€][    What  are  the  principal  divisions  of  taxation? 

Taxes  may  be  direct  and  indirect.  Direct  taxes  are 
those  intended  to  be  paid  by  the  person  upon  whom  they 
are  levied.  Indirect  taxes  are  paid  in  the  first  instance 
by  those  upon  whom  they  are  levied,  but  the  burden 
is  later  expected  to  shift  upon  the  consumers  of  the  arti- 
cles taxed.  The  direct  taxes  are  the  income  tax,  the 
general  property  tax,  the  inheritance  tax,  the  land  tax 
and  the  poll  tax,  also  the  corporation  tax,  the  excess 
profits  tax  and  the  war  excess  profits  tax,  which  three 
latter  taxes  are  in  some  senses  of  the  word  indirect. 
The  principal  indirect  taxes  are  the  customs  or  tariff 
and  the  excise  or  internal  revenue  tax. 

€1    What  are  the  advantages  and  disadvantages  of  direct 
taxation? 

Direct  taxes  are  more  certain,  stable,  simple  and 
economical  than  indirect  taxes.  As  taxes,  they  are 
easier  to  understand  than  indirect  taxes.  By  their  use, 
duplication  is  discouraged,  there  is  a  stronger  appeal 

18 


GOVERNMENT         FINANCING 


to  the  intelligence  and  responsibility  of  the  tax  payer 
and  they  can  be  better  adjusted  to  his  ability  to  pay. 
They  bear  particularly  upon  the  rich  and  well-to-do 
provided  they  are  levied  upon  ascertained  property  or 
income. 

Their  disadvantages  are  that  they  are  recognized  as 
taxes  by  the  poor  and  those  who  object  to  paying  taxes. 
They  cannot  be  made  to  reach  wage  earners  and  the 
great  body  of  citizens  as  readily  as  indirect  taxes.  They 
are  more  likely  to  cause  political  disturbance  when 
increased.  They  cannot  be  so  readily  decreased. 

What  are  the  advantages  and  disadvantages  of  w- 
direct  taxation? 

Advantages — inasmuch  as  they  can  be  disguised,  in- 
direct taxes  reach  the  wage  earners  and  those  who  object 
to  paying  taxes.  When  increased,  they  provoke  less 
political  disturbance.  They  operate  as  an  additional 
tax  upon  the  wealthy  and  well-to-do,  i.  e.,  they  are  pro- 
ductive though  not  always  just.  They  tend  to  increase 
and  decrease  automatically. 

Their  disadvantages  are — that  in  time  of  war  or  great 
depression  when  revenue  is  most  needed,  they  fall  off 
rapidly.  They  are  more  expensive  to  collect  and  require 
a  larger  administrative  organization.  When  largely 
used,  industries  affected  by  them  tend  toward  monopoly. 
Extravagance  in  public  expenditure  developes  because 
the  burden  of  taxation  not  being  brought  home  to  the 
tax  payer,  he  does  not  feel  a  responsibility  for  funds 
raised  thereby. 

What  other  division  of  taxation  is  there? 

Taxation  may  be  single  or  multiple.    A  single  tax  is 

19 


GOVERNMENT         FINANCING 


one  which  affects  only  one  kind  of  income  or  porperty, 
as  the  land  tax  advocated  by  Henry  George.  By  multi- 
ple taxation  is  meant  more  than  one  tax  upon  various 
kinds  of  property. 

€|    What  are  the  advantages  and  disadvantages  of  single 
taxes? 

They  are  more  easily  understood  and  estimated, 
easier  and  cheaper  to  collect  and  administer.  Their 
burden  and  effect  is  more  easily  calculated.  Their  main 
disadvantages  lie  in  their  inelasticity  and  their  inability 
to  be  adjusted  to  the  varying  needs  of  the  government. 
The  full  burden  of  taxation  is  realized  and  felt  by  the 
tax  payer.  Such  tax  payers  as  are  so  inclined,  may 
conceal  their  taxable  resources  and  thus  escape  taxation. 

€1    What  are  the  advantages  and  disadvantages  of  multi- 
ple taxes? 

The  advantages  of  multiple  taxation  are  that  they  are 
paid  with  less  objection.  The  tax  burden  is  divided  and 
reaches  the  tax  payer  at  different  times.  Hence,  it  is 
not  felt  so  keenly.  These  taxes  may  be  made  to  reach 
all  forms  of  wealth,  even  the  smallest  incomes.  They 
are  more  productive.  They  are  more  adaptable  as  a 
means  of  taxation  for  the  support  of  the  separate  fed- 
eral and  state  governments.  Their  disadvantages  are 
that  they  are  more  uncertain  than  single  taxes  and  tend 
toward  duplication  and  complication  in  administration. 

€][    What  is  conscription  of  capital  or  income? 

By  conscription  is  meant  the  arbitrary  taking  of  all 
or  a  portion  of  the  income  or  capital  of  our  citizens  for 

20 


GOVERNMENT         FINANCING 


government  purposes.  Partial  conscription  of  incomes 
generally  applied  would  be  practically  equivalent  to  an 
income  tax.  Conscription  of  capital  would  at  present 
be  in  contravention  to  our  constitution  as  taking  private 
property  for  a  public  purpose  without  compensation. 

In  England,  the  proposal  has  taken  several  forms.  Its 
most  pronounced  advocates  would  make  a  levy  of  as 
much  as  20%  upon  the  fortunes  of  British  subjects 
from  the  well-to-do  classes,  up.  The  Statist  of  London 
suggests  that  the  wealthy  people  of  the  British  Empire 
voluntarily  redeem  enough  of  the  debt  to  make  possible 
an  easy  reduction  of  the  remainder  on  the  theory  that 
the  example  thus  set  by  the  rich  would  be  most  heartily 
appreciated  by  the  people,  and  that  they  might  best  do 
this  gradually  by  annual  amortization  extending  over  a 
reasonable  number  of  years.  The  greater  portion  of 
the  British  public,  however,  at  the  present  time  does  not 
accept  either  the  project  itself  or  its  reasonable  effects. 

€j[    What  are  the  arguments  for  and  against  raising  war 
funds  by  borrowing? 

The  main  argument  for  a  policy  of  borrowing  is  that 
it  is  productive,  if  the  loyalty  and  support  of  the  people 
can  be  retained.  It  has  all  the  advantages  which  per- 
suasion has  over  compulsion.  The  patriotism  and  loy- 
alty of  the  people  is  fanned  by  the  appeal  to  support 
their  government  by  investing  in  its  obligations.  The 
thrifty  are  encouraged  to  save  by  investment.  The  pres- 
ent generation  shifts  to  a  later  one  at  least  a  partial  pay- 
ment of  the  war  expenses.  It  causes  industries  which  are 
not  handicapped  by  burdensome  taxation  to  expand  and 
by  reason  of  initiative  thus  developed  during  the  war 
period,  the  industrial  machinery  of  the  country  is  better 

21 


GOVERNMENT         FINANCING 


prepared  to  engage  upon  a  constructive  peace  program 
immediately  at  the  close  of  the  war.  This  is  especially 
so  because  many  of  the  non-essential  industries  which 
are  the  more  important  ones  from  the  standpoint  of  com- 
mercial exchange  in  peace  times,  are  better  protected  by 
the  borrowing  process  of  financing. 

The  arguments  against  borrowing  as  a  method  of  war 
financing  are,  first,  it  tends  to  emphasize  the  distinction 
between  the  rich  and  the  poor  by  creating  two  classes 
among  our  citizens,  the  bond  holding  and  the  non-bond 
holding.  Those  who  have  the  money  to  invest  during 
the  war  have  been  stimulated  to  thrift  by  buying  the  war 
issues,  while  the  poorer  people,  burdened  with  the 
higher  cost  of  living,  have  not  had  the  ability  to  invest. 
After  the  war  is  over,  however,  the  poor  must  bear  their 
share  of  taxation  to  pay  off  the  bonds.  Second,  it  is 
unjust  to  the  soldiers  and  sailors  engaged  in  the  war,  for 
with  their  small  pay,  they  are  unable  to  make  invest- 
ments. Their  competitors  in  civil  life  are  thus  enabled 
to  improve  their  position  by  entering  the  bond-holding 
class  while  the  soldiers,  having  fought  the  country's  bat- 
tles, must  bear  their  portion  of  the  tax  burden  to  pay  for 
the  bonds  after  the  war  is  over.  Third,  people  cannot 
be  forced  to  buy  bonds,  so  that  everybody  with  ability 
to  help  finance  the  war  is  not  reached  by  the  borrowing 
policy.  Fourth,  the  government  coming  into  competi- 
tion with  the  people  in  the  market,  borrowing  causes  a 
general  advance  in  prices,  thus  increasing  the  money 
cost  of  the  war  to  the  government.  Fifth,  many  sub- 
scribers to  war  bonds  do  not  depend  upon  their  past  or 
current  savings  to  pay  for  them,  but  borrow  from  their 
banks,  in  many  instances  giving  the  bond  purchased  as 
a  security  for  the  debt.  This  process  expands  credit,  for 

22 


GOVERNMENT        FINANCING 


the  bank  issues  its  notes  to  the  borrower,  or  its  deposits 
are  increased  and  the  practical  effect  is  that  while  there 
is  an  increased  amount  of  money,  the  same  amount  of 
money  does  not  buy  the  same  amount  of  goods.  In  the 
competition  between  the  government  and  its  citizens  for 
goods  and  labor,  the  government  has  the  money  and  is 
not  worried  by  advancing  prices,  but  the  loan  is  more 
speedily  exhausted.  This  means  new  borrowing  and  so  on 
with  each  additional  loan.  With  the  rise  in  prices,  the 
amount  of  necessities  which  people  can  buy  grows  less. 
This  process  is  called  inflation.  Sixth,  the  greater  the 
number  of  loans,  the  higher  the  rates  of  interest  become, 
thereby  adding  to  the  cost  of  the  war  which  must  ulti- 
mately be  paid  by  taxation.  Seventh,  borrowing  does 
not  reduce  unnecessary  consumption  to  the  greatest  pos- 
sible extent  because  the  prosperous  will  have  more 
money  and  continue  to  buy  non-essentials.  Eighth,  the 
burden  of  raising  taxes  after  the  war  to  pay  for  the 
bonds  handicaps  the  people  in  raising  money  for  more 
constructive  purposes  when  peace  returns.  Ninth,  to 
meet  this  condition,  a  concealed  or  indirect  method  of 
taxation  is  encouraged.  Such  taxation  being  based  on 
expenditure,  affects  the  poor  to  a  much  greater  extent 
in  proportion  than  the  wealthy  and  places  upon  them  an 
undue  tax  burden. 

€J   Have  domestic  loans  any  advantages  over  foreign 
loans? 

They  have  all  the  advantages  that  come  with  an  or- 
ganized appeal  to  patriotism  and  loyalty  in  the  sale  of 
the  bonds,  they  encourage  economy  and  saving  among 
the  nation's  own  citizens  and  keep  the  control  of  the 

23 


GOVERNMENT         FINANCING 


conditions     of    the    loan  with  the  government  itself. 
Domestic  loans  are  therefore  less  apt  to  cause  inflation. 

€J    What  are  the  arguments  for  and  against  taxation  as  a 
means  of  war  financing? 

A  policy  of  taxation  is  more  equitable,  first,  to  those 
engaged  actively  in  the  fighting  and,  second,  to  wage 
earners  and  those  working  for  salaries.  Being  compul- 
sory and  general,  it  thus  reaches  all  incomes  except  those 
which  are  exempt.  It  also  has  the  advantage  of  the  pay- 
as-you-go  policy,  by  saving  the  people  from  paying 
interest  on  that  part  of  the  cost  of  the  war  which  is  paid 
during  its  progress.  It  encourages  and  enforces  savings 
and  lessens  the  demand  of  the  citizens  for  non-essential 
goods.  It  tends  to  transfer  to  the  government  that  labor 
which  is  taken  from  the  non-essential  industries  discour- 
aged by  lack  of  patronage  on  the  part  of  the  people.  It 
places  a  large  burden  of  taxation  upon  the  wealthy  who 
are  becoming  more  wealthy  by  reason  of  the  war.  The 
tax  burden  is  imposed  at  a  time  when  incomes  are  high 
and  patriotism  is  at  the  boiling  point  and  when  such 
burden  will  be  least  felt.  By  preventing  credit  expan- 
sion and  inflation  it  keeps  the  cost  of  the  war  at  a  mini- 
mum. It  improves  the  morals  of  the  people  by  com- 
pelling self-denial  and  thrift;  every  self-denial  will 
release  some  goods  or  some  service  which  the  govern- 
ment can  use.  The  danger  of  class  antagonism  after 
the  war  is  eliminated. 

The  disadvantages  of  this  policy  are,  that  it  may 
impair  the  ability  of  tax  payers  to  invest  in  the  govern- 
ment securities,  which  it  will  inevitably  become  neces- 
sary to  issue  as  the  war  progresses.  It  discourages 

24 


GOVERNMENT         FINANCING 


industry  by  taking  away  its  ability  to  expand,  and  thus 
at  the  end  of  the  war,  'when  the  reconstruction  process 
begins,  our  ability  to  supply  our  own  and  the  world's 
normal  requirements  is  impaired.  Excessive  taxation 
on  consumption  will  cause  popular  resentment,  exces- 
sive taxation  on  business  will  handicap  production,  dam- 
pen enthusiasm  and  initiative  and  restrict  the  support  of 
developing  enterprise  at  the  time  when  help  is  most 
needed.  Ill-advised  taxation  will  interfere  with  the 
support  of  educational  and  philanthropic  enterprises. 

CJ    What  are  the  advantages  and  disadvantages  of  con- 
scription? 

It  is  urged  in  England  where  the  matter  is  most  dis- 
cussed, that  whatever  the  means  adopted  for  meeting 
the  financial  burden  of  that  country  after  the  war,  it  can 
not  be  borne  to  any  great  extent  by  the  working  or  sal- 
aried classes;  therefore,  the  money  can  only  come  from 
those  who  have  it.  It  is  further  urged  that  the  true  cri- 
terion for  graduation  in  conscription  should  be  based 
upon  the  principle  that  the  state  should  look  to  what  it 
leaves  a  man  rather  than  to  what  it  takes  from  him,  that 
conscription  cheerfully  acquiesced  in  by  the  wealthy 
would  tend  to  eliminate  the  antagonism  of  the  poorer 
classes. 

Besides  the  constitutional  objection,  conscription 
would  be  strongly  opposed  and  impracticable  in  this 
country.  Some  of  our  capital  at  least  would  go  into 
hiding  and  might  be  diverted  into  investments  outside 
of  our  borders.  Besides,  in  this  country  there  are  too 
many  men  who  have  built  their  fortunes  from  the  ground 
up  to  create  a  welcome  atmosphere  •  for  so  arbitrary  a 
policy.  One  of  the  greatest  disadvantages  with  such  a 

25 


GOVERNMENT         FINANCING 


system  would  be  the  difficulty  of  equitably  valuing  the 
capital  assets  of  a  citizen  for  the  purpose  of  taking  a 
portion  of  them  for  government  purposes.  Much  of  the 
taxpayer's  wealth  is  invested  in  fixed  assets  which  are 
liable  to  great  and  sudden  changes  due  to  inventions  and 
improvements  in  methods.  For  this  reason,  the  appraise- 
ment for  the  purposes  of  conscription  of  a  citizen's  net 
worth  might  be  very  unjust  to  him,  in  view  of  the  fact 
that  the  government  would  take  its  portion  in  cash  and 
leave  to  him  his  fixed  or  unliquid  assets. 

Name  some  considerations  which  enter  into  the  prob- 
lem of  war  financing. 

First,  the  immediate  necessities  of  the  case;  second, 
the  probable  length  of  the  war;  third,  the  wealth  of  the 
country;  fourth,  the  credit  standing  of  the  country; 
fifth,  the  popularity  of  the  war,  and  sixth,  adequacy. 

In  what  way  would  these  various  considerations 
affect  a  financing  policy? 

First,  the  necessity  of  immediate  defense  might  call 
for  a  large  sum  of  money  which  could  not  wait  upon 
the  processes  of  tax  collection,  or  even  upon  the  receipts 
from  the  sale  of  domestic  loans.  If  the  money  were  not 
on  hand,  the  only  way  to  raise  it  might  be  by  negotiating 
an  immediate  loan  from  a  foreign  country.  The  sale 
of  domestic  bonds  would  probably  precede  taxation  as 
a  means  of  obtaining  quick  results.  Second,  if  there 
were  no  considerations  of  immediate  haste  in  raising 
funds  and  the  war  gave  evidence  of  being  a  very  short 
one,  it  might  be  deemed  that  less  economic  disturbance 
would  be  occasioned  by  borrowing  money  either  from  a 
foreign  country  or  from  our  own  citizens  than  by  a  policy 

26 


GOVERNMENT        FINANCING 


of  taxation.  The  only  trouble  with  a  policy  moulded 
for  a  short  war  is,  that  with  the  danger  of  complications 
that  may  arise  with  neutral  nations  more  or  less  friendly 
or  allied  to  the  hostile  country,  there  is  no  positive 
means  of  knowing  what  the  length  of  any  foreign  war 
may  be.  Third,  a  wealthy  country  would  have  all  the 
methods  of  financing  open  to  it,  especially  if  it  enjoyed 
good  credit.  Such  a  case  would  encourage  the  most 
intelligent  and  comprehensive  study  of  conditions  in 
order  to  construct  a  wise  policy  of  financing.  Fourth, 
a  country  might  be  wealthy  and  still  have  a  poor  credit 
standing.  No  country  can  afford  to  let  its  credit  be 
questioned  as  there  has  seldom  been  a  war  when  finan- 
cial assistance  from  neutral  countries  was  not  desirable 
to  a  belligerent  nation.  Fifth,  the  popularity  of  the  war 
is  an  important  consideration  in  framing  a  financial 
policy.  For  a  very  unpopular  war,  a  policy  of  financing 
by  domestic  loans  might  not  prove  effective,  as  its  fail- 
ure would  tend  to  measure  the  degree  of  unpopularity 
in  which  the  war  was  held  and  thus  render  the  situation 
more  acute.  On  the  other  hand,  a  policy  of  burdensome 
taxation  might  prove  disastrous.  In  such  a  case,  good 
foreign  credit  would  be  very  desirable.  Sixth,  what- 
ever the  theory,  whatever  the  program,  everything  else 
must  give  way  to  the  mighty  consideration  of  adequacy. 
War  costs  money.  To  obtain  it  in  sufficient  quantities 
must  be  done. 

THE  PRESENT  LAW 
PART  III 

"The  present  is  never  a  happy  state  to  any  human  being." 

— Dr.  Johnson. 

In  one  respect,  the  present  war  revenue  and  income 

27 


GOVERNMENT         FINANCING 


tax  laws  have  been  noteworthy  and  that  is  in  the  splen- 
did and  uncomplaining  way  in  which  American  tax 
payers  have  met  the  numerous  and  rather  perplexing 
demands  therein  made  upon  them.  We  do  not  hesitate 
to  criticize  the  law  now  that  Congress  is  welcoming  such 
a  course  and  is  in  a  position  to  either  revise  or  recon- 
struct it.  Part  III  will  in  its  course  point  out  several 
defects  which  it  is  hoped  will  be  remedied. 

CJ    When  was  our  present  war  revenue  act  passed  and  of 
what  did  it  consist? 

It  was  passed  on  October  3,  1917,  superseding  an  act 
of  May,  1917,  which  was  thereby  repealed.  The  pres- 
ent law  provides,  (1)  an  additional  war  income  tax  and 
amendments  to  the  income  tax  passed  September  8, 
1916,  (2)  an  excess  profits  tax,  (3)  tax  on  beverages, 
(4)  war  tax  on  cigars,  tobacco  and  manufactures  there- 
of, (5)  war  tax  on  facilities  furnished  by  public  utilities 
and  insurance,  (6)  war  excise  taxes,  (7)  war  tax  on 
admissions  and  dues,  (8)  war  stamp  taxes,  (9)  war 
estate  taxes,  (10)  changes  in  postal  rates. 

CJ    Which  of  these  taxes  are  relied  upon  mainly  by  the 
government  to  raise  its  fund? 

The  income  taxes  and  the  excess  profits  taxes. 

CJ    What  is  the  difference  between  these  two  taxes? 

The  income  tax  is  a  tax  based  upon  the  income  of  the 
individual  or  corporation.  An  excess  profits  tax  is  a 
tax  that  is  based  upon  the  net  profits  of  an  individual, 
partnership  or  corporate  business  which  profits  exceed 

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GOVERNMENT        FINANCING 


what  is  designated  by  the  law  to  be  a  reasonable  return 
(7% to  9%)  upon  the  capital  invested  in  the  enterprise. 

What  is  the  essential  difference  between  our  excess 
profits  tax  and  the  British  war  profits  tax? 

The  British  war  profits  tax  is  also  a  tax  based  upon 
the  profits  of  the  individual,  partnership  or  corporate 
business,  but  only  upon  the  excess  of  those  profits  earned 
during  the  war  period,  which,  by  reason  of  the  war,  have 
exceeded  profits  made  in  the  same  business  during  a 
designated  period  preceding  the  war  when  profits  were 
normal.  Under  our  law,  profits  made  during  the  war 
period  which  are  not  so  large  as  those  made  during  the 
pre-war  period  will  be  taxed,  if  they  exceed  the  percent 
of  reasonable  return.  This  is  so,  even  if  there  "is  a 
depression  in  the  industry  caused  by  the  war. 

In  what  different  ways  is  it  possible  for  a  citizen  to  be 
taxed  under  our  present  income  and  excess  profits 
tax  laws? 

Indirectly,  he  would  be  affected  by  the  income  and 
excess  profits  tax  paid  by  the  corporation.  Directly,  he 
may  be  subject  to  an  individual  excess  profits  tax,  a  nor- 
mal income  tax  under  the  law  of  1916,  a  surtax  under 
the  law  of  1916,  a  normal  tax  under  the  law  of  1917 
and  a  surtax  under  the  law  of  1917. 

Why  were  not  all  these  taxes  combined  under  one 
rate  levy? 

The  income  tax  passed  in  1916  was  designated  to  be  a 
permanent  measure  for  obtaining  federal  revenue.  The 
additional  income  and  excess  profits  taxes  provided  by 

29 


GOVERNMENT        FINANCING 


the  act  of  October  3,  1917,  were  designed  for  war  pur- 
poses only  with  the  thought  that  they  could  be  more 
easily  repealed  after  the  war  if  the  separation  was  main- 
tained. 

^f    What  has  been  the  practical  effect  of  the  separation 
of  these  taxes? 

It  has  tended  to  complicate  the  matter  in  the  mind  of 
the  average  man. 

€J    What  has  been  the  general  criticism  directed  against 
the  whole  law? 

The  general  criticism  has  been  that  the  law  is  in- 
volved, its  language  and  terms  difficult  to  interpret  and 
its  meaning  obscure  and  perplexing. 

€][    What  have  been  some  of  the  criticisms  of  the  income 
tax  law? 

First,  the  taxing  of  earned  incomes.  Second,  the 
failure  of  the  law  to  deduct  all  actual  losses,  ascertained 
and  actually  realized,  in  all  transactions  engaged  in  for 
profit  whether  or  not  such  losses  were  sustained  in  con- 
nection with  the  usual  business  or  occupation  of  the  tax 
payer.  Those  who  criticise  the  law  believe  that  every 
citizen  should  be  permitted  to  indulge  in  transactions 
not  connected  with  his  business  or  occupation  and  should 
losses  ensue,  since  his  income  is  correspondingly  de- 
creased, they  should  be  allowed  in  the  income  tax  cal- 
culation. Third,  the  law  has  been  criticized  for  discrim- 
inating against  corporations;  for  instance,  it  is  claimed 
that  dividends  paid  to  corporations  should  be  treated 
for  the  purpose  of  the  normal  income  tax  in  the  same 

30 


GOVERNMENT        FINANCING 


manner  as  for  the  purppse  of  the  war  income  tax;  that 
is,  these  dividends  should  not  have  to  be  accounted  for 
by  the  recipient  corporation  in  preparing  its  income  tax 
report.  Further,  it  is  claimed  that  all  interest  paid  by 
a  corporation  should  be  deducted  from  its  earnings  for 
the  purpose  of  computing  its  net  taxable  earnings  for  the 
reason  that  interest  is  as  legitimate  an  item  of  expense 
as  wages,  materials,  insurance  or  taxes.  It  is  contended 
that  the  present  feature  of  limiting  the  amount  which 
can  be  deducted  from  interest  on  the  indebtedness  not 
exceeding  the  sum  of  the  paid-in  capital  plus  one-half 
of  the  interest  bearing  indebtedness  outstanding  at  the 
close  of  the  year,  should  be  removed. 

In  what  important  respect  does  our  present  income 
tax  law  differ  from  our  former  laws? 

In  that  it  emphasizes  "information  from  the  source" 
rather  than  "collection  at  the  source,"  one  instance  being 
to  require  all  employers  and  those  who  have  paid  income 
to  others  above  a  certain  amount,  to  report  that  fact  to 
the  government. 

How  has  this  principle  worked  out  in  practice? 

The  theory  of  information  from  the  source  is  sound 
and  essential  to  the  proper  administration  of  an  income 
tax  law.  The  main  difficulty  with  the  present  law  on 
the  subject  mentioned  above  is  that  it  has  been 
extremely  difficult,  from  the  reading  of  the  law,  to  know 
just  who  should  fill  out  returns  and  when.  In  returning 
individual  incomes,  the  amount  fixed  is  $800,  which  has 
been  criticized  as  too  low,  the  claim  being  that  in  no  case 
should  information  be  required  where  the  amount  of 

31 


GOVERNMENT        FINANCING 


payment  was  less  than  $1,000.  There  is  no  good  reason 
why  it  should  be  below  the  minimum  amount  where  tax- 
paying  liability  begins.  In  order  to  clarify  the  statute, 
it  has  also  been  suggested  by  some  that  the  operation  of 
the  law  be  restricted  to  reporting  from  a  specified  num- 
ber of  the  more  important  sources  of  income. 

CJ    Were  there  any  difficulties  with    the    excess   profits 
tax? 

There  were  a  number  of  fundamental  provisions  in 
the  law  that  were  difficult  to  understand,  so  that  not  only 
the  tax  payer,  but  the  administration  had  extreme  diffi- 
culty in  interpreting  it.  In  order  to  meet  this  difficulty, 
a  commission  was  appointed  to  assist  the  treasury  de- 
partment in  the  interpretation  of  the  measure.  This 
commission  issued  a  series  of  regulations,  which  though 
not  having  the  force  of  law,  have  been  read  into  the  law 
for  the  purpose  of  making  it  more  practicable. 

C|    Is  this  a  satisfactory  situation? 

No,  the  validity  of  the  regulations  might  be  attacked 
as  a  matter  of  law  and  thus  caused  delay  in  collections 
when  delay  would  be  most  expensive. 

fl    What  are  some  of  the  principal  criticisms  of  this  law? 

First,  the  complexity  of  the  language  throughout  the 
law;  second,  the  difficulty  in  determining  what  is 
invested  capital  in  such  a  way  as  to  do  substantial  jus- 
tice when  used  as  the  basis  of  the  tax;  third,  the  differ- 
ence in  the  amounts  of  the  tax  due  to  mere  accident  of 
the  form  of  the  original  corporate  organization; 
fourth,  the  placing  of  a  burden  upon  brains  and 

32 


GOVERNMENT        FINANCING 


enterprise  in  a  business,  which  could  not  be  brought 
under  the  head  of  nominal  capital,  thus  taking  the  busi- 
ness out  of  the  category  of  a  fixed  rate  of  8%  and  plac- 
ing it  in  a  class  of  rapidly  advancing  rates  which  would 
mean  much  higher  taxes;  fifth,  the  narrow  limits  of  the 
1%  and  9%  rule  when  the  widely  different  kinds  and 
nature  of  businesses  in  all  the  different  sections  of  the 
country,  the  varying  risks  to  be  run,  etc.,  are  consid- 
ered; sixth,  the  inclusion  of  borrowed  money  in  deter- 
mining invested  capital,  thereby  discouraging  a  business 
with  good  prospects  from  pushing  ahead  by  employing 
the  capital  borrowed  from  others  obviously  more  effec- 
tively and  profitably  than  these  others  could  do;  seventh, 
business  contractions  caused  by  taking  cash  out  of  a 
business  to  pay  the  tax  which  was  based  upon  book 
profits  only;  thus  in  many  instances  prohibiting  a  pro- 
gressive policy;  eighth,  the  confusion  between  capital 
and  income,  for  instance,  where  a  man  had  invested  his 
brains  in  an  enterprise  with  no  returns  until  the  final 
sale  which,  though  representing  a  profit  on  the  original 
investment,  did  not  recognize  the  capital  accumulation 
due  to  his  own  labor  and  self-denial;  ninth,  the  lack 
of  a  bureau  of  appeals,  to  relieve  the  necessarily  arbi- 
trary administration  of  the  law. 

CJ    What  can  be  said  of  the  theory  of  the  excess  profits 
tax  law? 

This  law  has  been  criticized  as  a  tax  upon  industry 
which  neither  reaches  profiteering  nor  is  just  throughout 
its  operation.  Business  which  is  organized  conservative- 
ly and  which  in  normal  times  has  been  continuously 
making  larger  profits  than  the  limits  set  by  law,  is  unduly 
taxed  while  others,  making  huge  profits  by  reason  of  the 

33 


GOVERNMENT        FINANCING 


war  and  organized  on  a  more  liberal  basis,  are  not 
assessed  as  heavily  in  proportion.  It  is  an  indirect 
method  of  reaching  incomes  which  has  the  moral  disad- 
vantages of  all  indirection. 

PART  IV 

A  FEW  SUGGESTIONS 

*'I  want  to  help  you  to  grow  as  beautiful  as  God  meant  you 
to  be  when  he  thought  of  you  first."          — George  MacDonald. 

Suggest  a  program  for  financing  America's  part  of 
the  war. 

1.  Adopt  a  national  executive  budget  system. 

2.  Create   a   commission   to     analyze     our     wealth 
resources  as  a  basis  for  taxation  and  to  study  and 
report  upon  the  effect  of  taxation  on  production 
and  wealth. 

3.  Simplify  our  tax  system  by  centering    on    the 
individual  income  tax. 

4.  Use  luxury  or  excise  taxes  only  directly,  to  induce 
economy. 

5.  Use  war  profits  taxes  as  necessity  dictates  and  to 
control  profiteering. 

6.  Tax  to  the  intelligent  limit. 

7.  Borrow  the  rest,  if  possible  from  our  citizens,  and 
push  the  war  savings  stamp  campaign. 

8.  Provide  for  a  Board  of  Referees  and  Appeals  in 
tax  matters. 

34 


GOVERNMENT        FINANCING 


€J    What  is  a  national  executive  budget? 

First,  an  estimate  of  federal  governmental  expendi- 
tures for  the  next  fiscal  year  prepared  through  the 
national  executive  and  which  is  based  (a)  upon  the 
expenditure  experience  of  the  former  year  or  years  and 
(b)  upon  an  estimate  of  the  amount  needed  for  the  con- 
structive program  for  the  individual  year  in  question. 
Second,  a  work  program  designed  as  a  guide  and  to  jus- 
tify the  requests  made  in  the  estimate.  Third,  a  plan 
for  raising  the  funds  required,  which  shall  be  based 
upon  an  analysis  of  fiscal  resources. 

CJ   How  is  the  budget  to  be  adopted? 

First,  by  the  executive  presenting  the  budget  to  Con- 
gress acting  as  a  Committee  of  the  Whole.  Second,  by 
the  executive  holding  himself  and  the  department  heads 
in  readiness  for  examination  before  the  Committee  of 
the  Whole  for  the  purpose  of  explaining  and  defending 
the  estimates  of  the  budget.  Third,  by  Congress  passing 
the  budget  measure.  Fourth,  by  providing  for  a  popular 
decision  in  case  of  irreconcilable  conflict  between  the 
executive  and  Congress. 

CJ    What  are  the  advantages  of  a  budget  system? 

(a)  It  is  the  indispensable  first  step  toward  placing 
government  finance  upon  a  business  basis,  (b)  It  in- 
jects intelligence  into  the  government's  spending  pro- 
gram, (c)  By  its  originating  with  the  executive,  respon- 
sibility is  provided,  (d)  The  support  of  the  budget  by 
the  executive  and  its  discussion  in  a  Committee  of  the 
Whole  of  Congress,  induces  wholesome  publicity  for 
our  expenditure  program,  insures  additional  responsi- 
bility and  curtails  the  reprehensible  system  of  log 

35 


GOVERNMENT        FINANCING 


rolling  among  the  members  of  Congress,  (e)  The  work 
program  brings  system  into  the  administration  of  our 
finance,  (f )  The  plan  for  raising  the  funds  demands 
an  intelligent  analysis  of  our  wealth  resources  and  finan- 
cial possibilities. 

What  are  the  disadvantages  of  the  budget  system  and 
to  what  extent  are  they  not  disadvantages? 

First,  it  takes  away  the  initiative  of  budget  prepara- 
tion from  the  members  of  Congress,  which  is  supposed 
to  be  open  to  constitutional  objection;  however,  Con- 
gress would  still  have  the  right  to  discuss,  modify  and 
pass  the  measure  proposed.  Second,  it  is  alleged  to  be 
inelastic  as  making  no  provision  for  emergency  and 
essential  matters  that  may  arise  during  the  fiscal  year 
which  do  not  appear  in  the  budget  estimate.  There  is 
no  reason  why  such  measures  should  not  be  taken  care 
of  by  a  fund  created  for  the  purpose  and  so  guarded  that 
the  desirable  features  of  the  budget  system  may  still  be 
preserved.  Third,  it  places  in  the  hands  of  the  execu- 
tive too  much  power.  Where  power  is  modified  by 
responsibility,  there  is  little  danger  of  its  arbitrary 
employment. 

Has  our  government  a  budget  system? 

It  has  not.  During  the  administration  of  President 
Taft,  an  attempt  was  made  to  give  the  country  a  budget, 
but  it  was  never  allowed  to  be  put  into  effective  opera- 
tion. During  the  present  war,  the  messages  of  President 
Wilson,  and  the  recommendations  of  Mr.  McAdoo, 
Secretary  of  the  Treasury,  have  been  the  nearest  ap- 
proach to  budget  thinking  and  preparation  that  we 
have  had. 

36 


GOVERNMENT         FINANCING 


CJ  Would  a  commission  to  analyze  our  wealth  resources 
and  to  study  the  effect  of  taxation  on  production  and 
wealth,  be  a  valuable  feature  in  our  financial  pro- 
gram? 

The  mere  statement  of  the  case  shows  the  important 
work  that  is  open  to  such  a  commission.  It  would  nat- 
urally follow  the  adoption  of  a  budget  system,  but 
should  be  provided  for  in  any  event.  The  grasp  that 
could  thereby  be  obtained  on  our  national  economy 
would  be  of  great  constructive  assistance,  not  only  dur- 
ing the  progress  of  the  war,  but  in  contemplating 
future  enterprises.  It  is  not  enough  to  arbitrarily  and 
unintelligently  fix  the  relationship  between  taxation 
and  borrowing  as  a  means  of  war  financing.  It  is 
much  more  desirable  that  this  relationship  shall  be 
established  by  a  thorough  study  and  analysis  of  our 
resources,  always  keeping  in  mind  the  importance  of 
noting  the  effect  of  the  present  method  and  rates  of  tax- 
ation upon  industrial  development.  There  is  no  com- 
parison between  the  constructive  importance  of  such  a 
commission  and  the  present  commission  that  exists  for 
the  purpose  of  interpreting  and  rendering  practical  the 
present  involved  law. 

CJ  To  what  general  principles  should  every  tax  system 
conform? 

To  principles  of  certainty,  justice,  convenience,  eco- 
nomy, simplicity,  elasticity,  productivity  and  of  mini- 
mum interference  with  the  machinery  of  production. 

f[  Does  our  present  system  of  federal  taxation  meet 
these  conditions? 

It  offends  particularly  against  principles  of  sim- 
plicity and  justice.  It  might  also  be  criticised  as 

37 


GOVERNMENT         FINANCING 


interfering  more  than  it  should  with  the  machinery  of 
production. 

CJ   Is  there  any  remedy  for  our  present  complicated  tax 
system? 

The  main  cause  for  the  complexity  and  injustice  of 
the  present  law  being  the  provision  for  so  many  possi- 
ble taxes  against  the  same  individual  with  their  differ- 
ent bases  for  assessment  and  variable  rates,  it  would 
seem  that  the  remedy  would  obviously  lie  in  adopting 
if  possible  some  one  basis  of  taxation  that  would  be 
scientific  enough  in  principle  and  elastic  enough  in 
practice  to  cover  the  needs  of  the  government.  Then,  by 
concentrating  upon  the  efficient  collection  and  adminis- 
tration of  such  a  tax,  the  whole  would  tend  more  nearly 
to  an  ideal  system  than  our  present  one.  Above  all, 
such  taxes  should  be  kept  as  nearly  direct  as  possible, 
for  while  direct  taxes  are  felt,  at  the  same  time  they 
induce  responsibility,  the  lack  of  which  is  the  most 
glaring  deficiency  in  our  financial  system. 

^    What  theory  of  taxation  will  best  meet  this  require- 
ment? 

The  individual  income  tax,  studied  and  perfected  in 
the  justness  of  its  application  and  administration.  At 
first  disapproved,  it  has  been  growing  in  popularity  until 
it  is  now  the  basis  of  taxation  of  many  of  the  best 
financed  countries.  Administrative  difficulties  which  for- 
merly seemed  almost  insuperable,  within  the  past  few 
years  are  being  successfully  solved  by  the  more  exten- 
sive use  of  this  tax.  The  income  tax  is  scientific  and 
direct  and  can  be  made  elastic  by  providing  for  the 
intelligent  raising  or  lowering  of  the  rates.  Departing 

38 


GOVERNMENT        FINANCING 


from  this  basis  may  be  necessary  and  desirable,  but  will 
always  tend  toward  complication  and  duplication. 

Should  not  tariffs  and  excises  still  be  used? 

There  is  no  reason  why  they  should  not  be  used  if 
scientifically  or  practically  justified,  but  they  should  not 
be  made  the  central  theory  of  our  scheme  of  taxation; 
that  is,  they  should  not  be  justified  as  a  tax,  but  if  a 
tariff,  say  as  a  protection  to  industries,  and  if  an 
excise,  then  as  a  controlling  or  repressing  agency. 
The  money  so  collected  would  of  course  be  used  for 
government  needs  and  should  be  taken  into  consid- 
eration in  creating  the  budget  and  adjusting  the  rates  of 
the  basic  tax  suggested  therein. 

What  about  luxury  taxes? 

If  luxury  taxes  are  paid  by  the  manufacturer,  they 
are  a  form  of  indirect  taxation.  If  paid  directly  by  the 
consumer,  they  tend  to  economy  in  the  use  of  non-essen- 
tials and  for  this  reason  and  the  additional  one  that  the 
more  wealthy  probably  buy  the  most  luxuries,  this  type 
of  tax,  while  less  popular  would  be  more  justified  than 
some  other  forms.  However,  it  is  an  additional  tax  and 
would  thus  tend  to  complicate  our  system  of  taxation. 

Should  not  heavy  corporate  income,  excess  profits  or 
war  profits  taxes  be  used? 

As  a  necessary  and  convenient  method  of  war  financ- 
ing, probably  yes,  and,  of  these  the  war  profits  tax  is 
more  clearly  justified  as  the  simpler  and  more  effec- 
tive method  of  reaching  profiteering.  But  this  type  of 
taxes  should  not  be  considered  as  the  basis  of  our  war 

39 


GOVERNMENT         FINANCING 


finance  program.  What  is  really  intended  by  them  is 
to  reach  incomes  and  at  best  it  is  only  an  indirect  way 
of  doing  so.  Their  productivity,  their  ease  of  assess- 
ment and  collection  and  the  unfinished  status  of  the 
individual  income  tax  program  and  collection  machin- 
ery are  their  main  justification.  Their  primary  effect  is 
on  industry  itself,  whether  it  is  the  outgrowth  of  war  or 
not,  and  they  tend  to  repress  and  to  retard  it  as  well  as 
the  enterprise  which  plans  for  expanded  production.  This 
process  narrows  the  sources  of  taxation  and  especially 
bears  upon  the  more  important  and  necessary  production. 
As  book  profits  in  such  industries  are  not  always  actual 
profits,  the  tax  is  often  paid  with  great  hardship  and  at 
the  expense  of  necessary  progress.  It  would  seem  to  be 
an  economical  and  sound  policy  to  encourage  the  ex- 
pansion of  those  industries  which  are  producing  eco- 
nomic goods  that  are  in  demand.  If,  however,  a  direct 
tax  is  placed  upon  the  industry,  this  tax  will  be  collected 
in  money  which  at  tax  collecting  time  takes  out  of  the 
business  its  most  liquid  resources. 

On  the  other  hand,  when  the  distribution  of  the  pro- 
fits not  used  or  justified  by  the  business  program  are 
compelled  and  become  income  in  the  hands  of  indi- 
viduals, though  the  same  money  may  be  taxed,  there 
would  not  be  the  same  repression  of  growing  concerns. 
The  same  objection  applies  to  these  taxes  as  in  the  case 
of  any  indirect  tax,  viz.,  no  man  can  figure  just  how 
much  taxes  he  is  actually  paying,  which  tends  to  develop 
the  policy  of  avoiding  all  the  taxes  possible.  This  is 
a  basically  wrong  attitude  of  the  citizen  to  his  govern- 
ment. Certainty  of  taxation,  even  though  the  rate  is 
high,  will  induce  a  more  honorable  attitude  and  much 
greater  responsibility.  This  in  turn  would  mean  greater 
respect  for  and  loyalty  to  the  government. 

40 


GOVERNMENT        FINANCING 


To  what  extent  has  taxation  as  a  method  of  war 
financing  been  countenanced  in  the  past? 

Anywhere  from  no  taxation  at  all,  dependence  being 
placed  entirely  on  borrowing,  to  the  policy  of  providing 
for  the  annual  expenses  on  a  peace  basis,  the  interest  on 
the  existing  debt  and  the  interest  on  the  annual  loans. 
It  has  never  been  so  popular  as  in  the  present  war. 


To  what  extent  should  our  taxation  policy  be  carried 
in  the  present  war? 

The  theory  of  our  financial  policy  should  be  to  trans- 
fer to  the  government's  use  as  much  of  the  past  and 
current  savings  in  the  hands  of  our  people  as  is  con- 
sistent with  their  well-being  and  the  continued  health 
of  our  essential  and  basic  industries.  A  much  larger 
percentage  of  the  income  of  our  wealthy  citizens  should 
be  taken  directly  and  permanently  than  from  those  less 
well-to-do.  A  policy  of  economy  and  thrift  should  be 
urged  for  all  and  the  poorer  people  should  be  given  the 
opportunity  and  privilege  of  supporting  our  war  by 
providing  for  them  convenient  investments  in  govern- 
ment bonds  rather  than  by  a  too  arbitrary  taking  of 
their  savings  by  the  processes  of  taxation. 

Above  all,  the  economic  condition  of  the  country 
should  be  kept  well  in  mind  and  a  policy  of  drastic  tax- 
ation should  be  curbed  by  considerations  of  industrial 
health.  If  the  entire  cost  of  the  war  was  borne  by  tax- 
ation only,  it  would  require  all  the  potential  savings  of 
the  people  during  the  war.  There  would  be  no  new 
factories,  no  additions  to  plants,  no  progressive 

41 


GOVERNMENT        FINANCING 


enterprise  during  the  war.  Such  extreme  taxation  would 
dry  up  the  sources  of  wealth  which  produce  taxes.  If  for 
no  other  reason  than  that  of  diversity  of  method  and  the 
value  of  its  patriotic  appeal,  there  should  be  borrow- 
ing and  there  should  be  left  enough  funds  in  the  hands 
of  the  people  to  make  every  flotation  of  our  bonds  a 
success. 

On  the  other  hand,  the  sad  experience  of  our  Civil 
War  with  its  policy  of  borrowing  should  be  a  lesson  to 
us  in  the  present  war.  Our  policy  of  taxation  should  be 
a  courageous  one  beginning  gradually  by  placing  a  tax 
upon  incomes  heavy  enough  to  be  productive.  These 
rates  of  tax  should  be  rapidly  increased  until  the  bur- 
den of  taxation  is  felt  and  economy  is  enforced.  In 
fixing  these  rates,  however,  it  must  be  remembered 
that  the  people's  savings  are  not  always  in  a  liquid 
condition  in  the  form  of  currency,  but  are  represented 
by  investment  in  homes  and  factories  and  state  and 
municipal  improvements.  A  loyal  people  will,  how- 
ever, cheerfully  bear  a  heavier  rate  of  taxation  in  war 
times  than  in  ordinary  times.  Advantage  should  there- 
fore be  taken  of  this  spirit.  If  economy  and  self-denial 
can  be  enforced,  goods  and  labor  will  be  released  for 
government  use  and  service.  The  spending  power  of 
the  individual  may  thus  be  curtailed,  but  that  of  the 
government  will  be  increased.  Above  all,  the  matter 
of  the  relationship  between  the  amount  of  taxes  raised 
by  borrowing  and  by  taxation  should  not  be  a  matter  of 
mere  guess  work,  or  the  application  to  the  problem  of 
attractive  and  easily  written  fractions,  but  it  is  a  matter 
of  so  great  importance,  as  to  warrant  the  most  serious 
study  and  report  upon  this  phase  of  the  situation  alone, 
of  the  best  equipped  minds  in  the  country. 

42 


GOVERNMENT        FINANCING 


CJ    What  principles  should  be  observed  in  our  bond 
issues? 

Our  bonds  should  be  issued  in  amounts  that  can  be 
readily  sold  and  even  over-subscribed  when  efficient 
methods  of  publicity  and  salesmanship  are  used.  The 
amount  of  any  one  issue  should  not  be  so  large  as  to 
encourage  borrowing  from  banks  by  the  patriotic  in 
order  to  subscribe  to  the  loan.  If  possible,  the  amount 
should  conform  with  what  can  be  paid  for  by  the  accu- 
mulated and  current  savings  of  the  people.  The  term 
of  the  bonds  should  not  be  so  long  as  to  burden  another 
generation  with  the  problems  of  our  own.  In  no  event 
should  the  length  of  term  be  over  an  average  genera- 
tion (thirty  years)  in  length — better  twenty  years.  The 
rate  should  correspond  with  the  market,  minus  the  rate 
value  for  the  additional  stability,  tax  features,  etc.,  of 
the  bond  to  be  issued.  If  anything,  the  rate  should 
err  in  favor  of  encouraging  the  virtue  of  thrift  in  those 
who  subscribe. 

Provision  should  be  made  for  their  convertibility  so 
that  the  patriotic  and  loyal  who  support  the  first  issues 
of  bonds  shall  not  be  made  to  suffer  in  comparison 
with  those  who  subscribed  at  a  later  date  on  more  favor- 
able rates  and  terms.  For  the  convenience  of  the  gov- 
ernment, a  clause  should  be  inserted  in  the  bonds  which 
will  permit  them  to  be  called  at  some  time  before 
maturity,  i.  e.,  the  estimated  time  when  the  country  will 
recover  from  the  war  and  treasury  accumulations  are 
mounting.  There  is  no  particular  reason  why  govern- 
ment bonds  should  be  freed  from  taxation.  This  is  es- 
pecially true  in  the  time  of  war  when  the  incomes  of  the 
rich  mount  rapidly,  when  the  cost  of  living  and  taxes  are 

43 


GOVERNMENT        FINANCING 


so  high  for  the  poor  that  they  are  unable  to  save  and  buy 
bonds  in  proportion  to  the  more  fortunate  "well-to-do" 
and  when  the  small  pay  of  the  soldiers  also  places  them 
at  a  disadvantage  in  buying  bonds.  Bonds  should  be 
issued  in  denominations  convenient  to  all  purchasers 
with  terms  of  payment  which  tend  to  stimulate  payment 
out  of  savings  from  current  earnings  rather  than  to 
encourage  resort  to  bank  borrowing  for  the  purpose. 

€J   How  has  our  government  observed  these  principles? 

The  policy  of  our  government  in  its  bond  issues  has 
been  an  admirable  one.  Its  domestic  loans  have  been 
absorbed  readily  and  without  causing  undue  inflation. 
The  amount  of  issue  has  never  been  so  large  but  what 
it  has  been  over-subscribed.  The  bonds  have  been 
issued  in  denominations  convenient  to  all,  the  rate  of 
interest  has  been  fair  and  the  later  policy  of  subject- 
ing the  bonds  to  tax  liability  is  to  be  commended.  In 
other  words,  by  reason  of  its  intelligent  policy,  the  gov- 
ernment is  offering  the  people  of  our  country  in  what- 
ever walk  of  life,  a  privilege  when  it  asks  them  to  invest 
in  its  securities. 

€1    What  can  be  said  of  the  tear  savings  stamp  policy? 

There  is  no  plan  of  raising  war  funds  that  is  more 
thoroughly  justified  than  this.  Every  principle  of  sci- 
entific government  borrowing  is  here  preserved.  It  is 
more  than  borrowing.  It  contains  a  lesson  in  loyalty 
and  an  education  in  thrift  and  should  be  advocated, 
emphasized  and  pushed  to  the  limit,  at  least  throughout 
the  course  of  the  war. 

44 


GOVERNMENT         FINANCING 


CJ    What  would  be  the  justification  and  functions  of  a 
Board  of  Reference  and  Appeals? 

According  to  American  theory,  provision  is  generally 
made  for  a  reference  and  appeal  from  those  depart- 
ments which  are  primarily  charged  with  the  adminis- 
tration of  laws  so  that  any  injustice  arising  from  im- 
proper or  arbitrary  rulings  may  be  corrected  by 
a  higher  tribunal.  The  Treasury  Department  is 
bound  to  make  mistakes  and  its  officials  will  in  the 
nature  of  things  become  more  or  less  arbitrary  unless 
they  are  intelligently  checked.  On  the  other  hand,  there 
will  be  cases  of  doubt  arising  in  the  administration  of 
our  tax  laws,  however  well  they  may  be  constructed, 
which  will  save  time  and  annoyance  if  they  can  be 
referred  to  an  authorized  Board  for  a  decision.  The 
English  practice  provides  for  this  reference  and  the 
same  should  be  adopted  here,  by  creating  a  Board  of 
Reference  and  Appeals  independent  of  the  Treasury 
Department. 

€][    Is  the  adoption  of  a  national  budget  system  and  a 
scientific  method  of  taxation  for  war  purposes  only? 

Their  adoption  in  time  of  war  is  the  best  guarantee 
of  successful  war  financing,  but  it  is  for  times  of  peace 
and  the  periods  of  our  normal  and  constructive  develop- 
ment as  a  nation,  that  the  adoption  of  these  two  meas- 
ures is  most  vital.  Each  is  necessary  to  the  other.  A 
scientific  plan  of  taxation  is  bound  to  follow  the  intelli- 
gent estimation  of  our  country's  needs  and  the  careful 
planning  for  its  development  and  cannot  properly  exist 

45 


GOVERNMENT        FINANCING 


unless  there  is  first  brought  to  bear  upon  it  the  indispen- 
sible  requisites  of  scientific  construction,  i.  e.,  intelli- 
gent planning.  A  better  system  of  taxation  means 
more  responsible  citizenship.  The  adoption  of  a  budget 
system  means  responsible  government.  Both  are  essen- 
tial to  America's  greater  destiny. 


TTHE  financing  of 
this  war  to  date 
by  our  government 
has  been  one  of  the 
most  remarkable 
achievements  in 
fiscal  history. 
Every  suggestion 
herein  is  made  with 
due  appreciation  of 
this  fact  and  with 
the  hope  that  our 
readers  will  give 
more  loyal  and 
intelligent  support 
to  the  Government, 
whatever  its 
program. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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OVERDUE. 


SEP   15  193* 


LD  21-100m-7,'33 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


LD  21-100m-7,'33 


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UNIVERSITY  OF  CALIFORNIA  LIBRARY 


